It’s said one of the great benefits of mistakes is they are a learning experience. While they aren’t welcome, mistakes being a learning experience is somewhat true. Mistakes can be an opportunity to understand where we went wrong and revise our thinking. Hopefully, becoming wiser in the future and putting us on a better path. Yet there are some disclaimers. Specifically, what type of mistake was made, how much damage the mistake did, and at what stage of life the mistake was made?
There are some mistakes you don’t want to make at any age. Certainly, none that involve injury to yourself or someone else, nor any mistakes that involve the legal system! As this is a financial blog, we’re of course talking about financial mistakes.
Every day in Australia many people will make financial mistakes. These will range from spending over saving, taking on too much debt, choosing the wrong investment, or falling into the trap of being defrauded of their money. The last one is measurable, given we’re told on an annual basis how much Australians lose to scams.
Some of the most notable financial mistakes we’ve seen made recently were the First Guardian, Shield Master Fund and Australian Fiduciaries failures. $1.2 billion of retirement savings went up in smoke.
In these failures there are varying ways investors ended up in the funds. Some investors have said they had no idea they were invested in the funds. This certainly isn’t their mistake. It’s outright deception. Others were already in large, well run super funds, but weren’t happy. They went to google, found a comparison website and started a process they didn’t understand. Their money was then rolled into these products that failed.
The process where high pressure sales tactics were used is unconscionable. However, there’s the part that led up to that. That’s where there needs to be some culpability. Some of the investors quoted in the media admit they were seeking higher returns. Several admit they were frustrated with the market performance around Covid. Simply unavoidable.
With 45 years in financial advice, we can speak to the urge to chase returns. Occasionally, we’ve had clients who thought the grass might be greener elsewhere. It wasn’t. Then there’s the occasional client who wanted to “keep us honest” by running a second self-directed portfolio so they could compare returns. They picked the best funds from last year, took more risk, and when their hindsight picks didn’t do better and cost them more in fees and taxes from portfolio turnover, they eventually gave up.
Chasing higher returns is usually a mistake. It’s often done by looking at what shot the lights out last year. On a long enough timeline the range of market returns only narrows. And on a short timeline, we’ve historically seen every decline followed by a recovery, so there’s no point getting frustrated. In the case where investors were already in funds with market like performance, chasing higher returns is an absolute mistake. The only way to potentially increase returns is by taking more risk.
To look at the long-term performance of some of the largest Australian super funds and say “that’s not good enough” is simply tempting fate. The people who’ve appeared in the media noting their losses and how they found themselves in Shield, First Guardian or Australian Fiduciaries, for the most part, have been in their 50’s and 60’s. These people were in an increasingly narrowing window to make any financial mistake. There’s little chance of recovery.
They are very fortunate they may be eventually compensated because they were part of these large and well publicised failures, where there’s pressure for various parties to make amends. Others who have been part of small-scale frauds or failures over the same period will not enjoy the same outcome.
Here’s a short guide to making financial mistakes.
Our teens: We aren’t going to make too many financial mistakes in our teens. We don’t have too much money. That will depend on the leash parents give us or whether we have a job yet. The good thing is some teens are willing to listen and learn. It’s tougher to get into debt because we usually can’t get our hands on any. Unfortunately, there’s claims that 30% of teens are already gambling via apps, which isn’t great news, but maybe lessons can be learned early. Either way, for teens there’s a whole lifetime ahead of them. Plenty of time to learn and get on the right track.
Our 20’s: When we’re in our 20’s, sometimes we can’t be told. It might be the first real taste of freedom, earning our own money, and everything needs to be experienced. With a reliable income there’s now the “opportunity” to take on debt. Usually, the temptation of car and credit card debt for lifestyle reasons. Aside from superannuation, there’s also the opportunity to invest. If mistakes are made and money is lost, it hopefully will be a lesson to focus on something more reliable in the future. So, losses in our 20’s aren’t ruinous. Bad debt is really the bigger danger; there would be nothing worse than wasting the next decade paying off the mistakes of the previous one.
Our 30’s: Potentially more likely to have a family and a home now, which increases the costs and can limit or divert spending. There’s also the temptation to keep up with the Joneses, which will be a mistake, and an even bigger one if done via bad debt. Maybe less capacity to invest, so those decisions may be delayed, but super will still be ticking over. Arguably, this is the last decade to make any serious mistakes. Lessons can be learned and there’s enough time for them to be recoverable.
Our 40’s: Things start becoming more serious in terms of making mistakes. Maybe there’s a little bit more money coming in, which can be invested judiciously, or not. There can be the urge to “catch up” which may lead to less judicious choices. There’s also the opportunity to ramp up the lifestyle spending, which may include a bigger house. The release valve that’s available from having a higher income, now only goes to servicing a higher level of debt. If mistakes are made, either money lost or too much debt, there may be a chance to recover through extremely disciplined behaviour.
Our 50’s: Now critical because as noted, with the aforementioned investment failures, people begin looking at account balances and returns. This can be dangerous territory if people start thinking it’s time to catch up. The most reliable way to increase a portfolio balance is time and increased contributions. The way to make a mistake is attempting it by chasing returns. In your 50’s is the second worst time to do it. Any significant financial mistake here will likely never be recovered from.
Our 60’s, 70’s and older: Any significant financial mistake here will never be recovered from. Everyone in their 60’s or older needs to understand this when approaching any financial decision. There’s just not enough time. Mistakes mean fewer choices which can become costly in many ways. And the one thing we haven’t mentioned is the psychological and emotional turmoil that comes with financial loss. Make a mistake in your 20’s and the ability to earn, save, and invest, will eventually take you past whatever was lost, both from a monetary perspective, and a psychological one. The older we are, the more the mistake will likely linger.
If you want to avoid mistakes, always discuss investment dilemmas with your financial adviser. Helping people avoid mistakes is the least understood, but one of the most critical things that we do.
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